18-8. Inflation and Exchange Rates

18-8. Inflation and Exchange Rates. Suppose the current exchange rate for the Russian
ruble is ruble 29.15. The expected exchange rate in three years is ruble 31.02. What
is the difference in the annual inflation rates for the United States and Russia over
this period? Assume that the anticipated rate is constant for both countries. What
relationship are you relying on in answering?

Solution Preview

The relationship is interest rate parity
The difference in interest rates between the two ...

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